Portfolio Analysis

Portfolio Analysis is a financial term which can be defined as a study and/or observance of the performance of a certain portfolio regarding the level of its return and the possible risks. The essence of the study is to find solutions for minimizing risks and increasing returns.The term refers to various financial instruments such as currencies, stocks, commodities, indices, and many more.

It is of utmost importance to analyze various assets because each asset behaves differently and has a particular level of risk and return. Hence, the performance of a portfolio is highly affected by each of the instruments, included in it. This is why investors prefer analyzing assets by means of available data provided by various softwares, which helps in deciding how to allocate the assets and calculate possible risks. Thus, it becomes more realistic to avoid possible negative performance of a portfolio to some extent.

Portfolio Analysis - Risk Aversion

Two main levels of analysis may be taken into consideration while discussing portfolio analysis: risk aversion and analyzing returns.

Risk Aversion

Risk aversion is the key component of portfolio analysis. The term describes the preferences of investors, who prefer to take high risks expecting to generate higher returns, or, vice versa, prefer safer trading and settle for lower profits. Efficient trading demands attention to risk aversion, as an investor may overexpose himself/herself to risk and lose profits.

Anayzing Returns

Analyzing returns is the second, important level of analysis, which is carried out by calculating possible returns through arithmetic and compound methods. The arithmetic method is a simple arithmetic calculation of the return average from each asset in a portfolio, while compound return method refers to the cumulative effect of the whole return.

Portfolio analysis has been studied by different economists, and many theories have been generated. However, theory and practice often diverge, and, it can be stated with confidence, that the practical realization of portfolio analysis is a complicated and challenging task that requires knowledge and patience. The process is somehow eased by many software tools, specially developed for performing portfolio analysis. It can be concluded, that optimal and profitable portfolios can be built through adequate evaluation of asset risks and calculation of possible returns.


GeWorko Portfolio Analysis Method